As the world grapples with fluctuating economic conditions, the stock markets in the United States are exhibiting a remarkable volatility, demonstrating a cycle that seemingly oscillates between peaks and troughsIn stark contrast, indices like the Nasdaq Golden Dragon China index have displayed impressive gains of 18% this year, while the European Stoxx 600 index has reached historical milestones.

This situation starkly illustrates a conundrum in the US where the S&P 500 index has struggled to maintain momentumRenowned strategist Michael Hartnett from Bank of America has recently issued a cautionary note highlighting that this index might be at a critical juncture, likening the current atmosphere in the markets to a phenomenon he refers to as the "seven-year itch." This notion suggests that investor confidence in US equities is waning, whereas certain technology stocks are about to face a rigorous test of their valuation.

On February 26, the S&P 500 index opened below the pivotal 4200 mark, continuing the narrative of a pullback established the prior week

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Although the index had reached a fresh high of 4280 on February 19 and 20, the sharp fluctuations that followed raised concerns about market stabilityIt took the S&P 500 a grueling 147 trading days to rally from 4000 to 4200, a pace that was 38% slower than the prior year, suggesting that investor patience is being tested.

Hartnett elaborated further, citing that the market seems to be afflicted by what he termed "new high anxiety." His observations draw parallels between today's market conditions and those prior to the bursting of the dot-com bubble in 2000. Back then, the Nasdaq Composite Index underwent an extended consolidation phase of 18 months after hitting record highs before experiencing a severe downturn.

Moreover, the intervals between peaks on the S&P 500 have notably lengthened from an average of 22 days in 2023 to approximately 45 daysThis reduction in upward momentum could be a sign that the market is nearing critical thresholds.

The once-reliable engines of the US stock market, such as tech giants Apple and Microsoft, are showing signs of strainThe combined weight of these "seven giants" in the S&P 500 has decreased from a peak of 32% in 2024 to 28.7% currentlyCollectively, they have shed market capitalization worth over $1.2 trillion since the start of the yearHartnett points out that these companies still hold a high price-to-sales ratio of 8.3 times compared to the historical average of 5.1, while their annual expenditures in artificial intelligence have surged beyond $200 billion, equating to daily expenses of $550 million.

This abundance of spending on technological capability might resemble an arms race, yet investors may come to realize that such expenditure may not necessarily yield consistent cash flows in the future

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Hartnett warns that the current valuation logic surrounding AI mirrors the excess exuberance seen during the internet boom two decades agoAn example includes OpenAI's recent announcement of a projected $10 billion revenue by 2025, which has catapulted its valuation to $200 billion with a staggering price-to-sales ratio of 20 timesFor context, when Amazon had briefly crossed the $10 billion revenue mark, its price-to-sales ratio stood at a modest 6 times.

As the allure of the S&P 500 begins to wane, capital is rapidly shifting its focus to other markets globallyData from Bank of America indicates that since 2025, international equity funds have seen a net inflow of $48 billion, whereas US stock funds have experienced a net outflow of $12 billionThis reversal in capital flow is particularly pronounced in emerging markets, where the MSCI Emerging Markets Index has posted an 11.2% increase year-to-date, with Vietnam's Ho Chi Minh Index skyrocketing by 27%, reaching unprecedented heights.

Hartnett further muses that the perceived strength of the dollar is diminishing, indicating that US equities may not be the sole investment alternativeHe notes a striking increase in global central bank purchases of gold, which surged to a record 320 tons in January 2025. This trend toward "de-dollarization" could profoundly impact the valuation fundamentals of the US stock marketAs global investors begin to appraise asset allocations through a "non-dollar lens," the S&P 500's "safe haven premium" may gradually erode.

Against the backdrop of increasing market volatility, political elements are emerging as significant variables

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For the first time, Hartnett introduces the concept of a "stock market traffic light," indicating that if the S&P 500 descends below the 5600-5700 range—which represents a 6% dip from current levels—the government might feel compelled to intervene financiallyThis forecast is influenced by the political implications of the upcoming midterm elections in 2024. Given the government's approval ratings have plummeted to 38%, a substantial market downturn could jeopardize their electoral prospects.

Government intervention could materialize in various forms, whether modeled after the Troubled Asset Relief Program (TARP) from 2008 or through direct purchases of ETFs akin to a US version of a stabilization fundHowever, Hartnett cautions that such measures would fundamentally alter market dynamics, asserting, "When the government becomes a last-resort buyer, the market's pricing mechanisms might falter, and moral hazards could be greatly amplified." He predicts that should financial stimulation occur, the S&P 500 might rebound 15% in the short run, yet long-term effects would likely plunge the market into a "policy dependency" trap.

Amid potential market upheaval, hedge funds on Wall Street are quietly positioning themselvesData from the Commodity Futures Trading Commission reveals that large speculators have ramped up their net short positions on the S&P 500 to 127,000 contracts, the highest level since October 2022. Furthermore, Goldman Sachs' index of "smart money" indicates the cash positions of professional investors have climbed to 5.2%, nearing levels seen prior to the 2007-2008 subprime mortgage crisis.

Hartnett concludes his report with a somber reflection on the current state of the markets, quoting poet T.S

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